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Thursday, November 11, 2010

Power Grid FPO - Why World Rushed In and Why Retail Investors Should Follow

The FPO of Power Grid Corporation (BSE: 532898, NSE: POWERGRID) closed the second day with overall oversubscription of 9.72 times, of which the QIBs led the rush with oversubscription of 15.29 times. But the reserved quota for retail individual investors was subscribed only 0.61 times. This anomaly seems to be due to a lack of understanding of Power Grid's growth prospects among the lesser informed retail investors.

For a developed world starved of growth opportunities, the emerging markets are no doubt the only bet to invest and grow their money. And in emerging markets, India stands out due to its advanced and well-regulated stock markets, while among the country’s various growth opportunities, power generation and transmission stands out as perhaps the only sector needed for all other sectors.

But one look at the country’s listed power space will be enough to convince anyone that not many quality investment opportunities are there any more. What you see is a bunch of private players, quoting at astronomical valuations, as well as a few PSU power companies quoting at modest valuations but which are increasingly being pressured in their operations.

For example, Indiabulls Power is trading at a price-earnings of 193, Reliance Power at a P/E of 142, Adani Power at a P/E of 72, Jaiprakash Power at 49, Tata Power at 40, and Reliance Infra at a P/E of 24.

Compared to these, Power Grid Corporation’s effective P/E at the FPO price of Rs. 90 is just 16. Is there any wonder then that the world rushed in?

Even if you assign Reliance Infra’s reasonable P/E to Power Grid, you have a scrip that can reach Rs. 136 on a modest re-rating. There is no reason why such a re-rating is an impossible scenario post-FPO as influential international brokerages are sure to wake up to the fact that smaller private players like Indiabulls, Reliance, Adani, Jaiprakash, or Tata are no match to a state-owned almost-monopoly like Power Grid.

But even while foreign institutional investors have lapped up as many shares as they can, domestic retail investors have been slower to this FPO. One reason for the relatively lukewarm retail support till now should be Power Grid’s rather flat price-performance over the year-to-date. But in the long run, all the scrip needs is a re-rating which has been partially fulfilled on the FPO opening date when Citi and Macquarie upgraded their outlook and target prices for Power Grid.

Anyway, retail demand should ideally change on the last and third day as retail investors have much more to gain, as the Power Grid scrip will come to them at a P/E of 15 due to the additional 5% discount. Even if Power Grid ends up at the comparable NTPC kind of valuations, that is at a P/E of around 19, this means an upside of almost 30% from the retail FPO price.

And the downsides are almost negligible. Because even if no valuation expansion takes place through a re-rating, here is a story that can appreciate solely on earnings expansion of 15-25% a year.

That is why Power Grid FPO can be one of those long-term wealth creators for retail investors much like the upcoming FPOs of better performing PSUs like SAIL, IOC, MMTC, SCI, RCF, ONGC etc.

Overall the scrip looks healthy for the long term perspective with on an average gain of 10-15% for next 5 years.....But the question to ponder why private players are operating at such higher PEs and this is the case with many sectors